Series 7 Episode 7: Accelerating to T+1: Building readiness through resilience

Transcript

Tessa Norman: Hi everyone, and welcome to the latest episode of Risk & Regulation Rundown, the podcast where we share our views on financial services, risk and regulatory hot topics. In today's episode, we're returning to the subject of T+1 settlement reform. We'll be talking about how firms are progressing towards transition and exploring why operational resilience should be central to firms' T+1 readiness programmes. I'm delighted to be joined by two returning guests to the podcast. I'm joined by Menicos Kouvaros, who's a Partner in our Financial Services Risk and Regulatory practice, and Duncan Scott, who's a Director in PwC's Technology, Data and Resilience practice. Welcome back to the podcast.

Menicos Kouvaros: Thanks, Tessa.

Duncan Scott: Thank you.

Tessa: Menicos, we last talked about T+1 on the podcast back in April time of this year and at the time we were joined by yourself and Andrew Douglas who's chair of the UK's Accelerated Settlement Taskforce, and back then we were talking about the journey to go live in October 2027, the UK, EU and Swiss markets and reflecting on some of the lessons learned from the North American experience and I think since then, it is fair to say there's been quite a few market developments and updates. It would be great if you could kick off today's conversation by sharing a bit of a recap in terms of where we are and what are the key updates from the past few months?

Menicos: Absolutely, and a huge amount has happened since our last podcast on this. Firstly, the EU Industry Taskforce published its roadmap to T+1 in July. The UK Accelerated Settlement Taskforce updated its implementation plan in September and broadly those two sets of plans are very harmonised. Both are focused on transition by 11 October 2027. They're aligned on the scope of products for T+1 in the need for post-trade automation. There are clarifications on the FST exceptions and alignment on FX settlement, risk and derivative treatment. Broadly speaking, the respective taskforce chairs did what they said they were going to do, which was to make sure that there was as much alignment as possible between the UK and EU approaches. That being said, the UK approach is a bit more market-led, behavioural standards in focus versus the EU outlining some very specific gating events and there's some timing differences in terms of cut-offs, etc., but broadly they're aligned and lots of credit to Andrew Douglas and Giovanni Sabatini in terms of bringing the teams together to achieve that alignment.

A couple of other things to mention. The Swiss securities post-trade council has formally recommended that Switzerland and Liechtenstein, not to be forgotten, are transitioning to T+1 settlement cycle on the same time frame and that's going through a market consultation period now, and what might be of note, or interest to our listeners is that the Hong Kong exchange published a discussion paper on moving from a possible shift from T+2 to T+1 for the cash equities market in Hong Kong and the HKMA has taken a stance that firms should be laying the groundwork to be ready for transition. So, more a stance of being prepared for a potential change, rather than coming out and fully endorsing a move. The timeframes on that are still in discussion.

Tessa: Okay, and then how does that relate to activity that you're seeing among your clients? How are they responding to some of those developments? And continuing their preparations and also, looking forward a little bit as well, what do you see as being the key areas of focus?

Menicos: Our European network, T+1 network, has had quite a lot of discussions across different FS sectors, across all those markets that we cover on the topic and there's, as you would expect, quite a broad range of where firms are. I'd say there's a small population that never took their foot off the pedal post the US transition, but I would say they're the exception rather than the norm. At the more sophisticated end, firms have started internal engagement, governance impact assessments, planning and those are at different levels of maturity and there is this big tale of firms, and one of the complexities of this topic is that there's lots of different market participants here that haven't mobilised yet and need to get cracking. There's a range of activity going on there, but certainly the momentum keeps increasing and increasing and increasing and in part, that's again, I'd say, through the hard work of Andrew Douglas and Giovanni Sabatini and their teams to engage industry bodies at industry events, at clients' events to keep pushing the message.

Tessa: Brilliant. Duncan, it'll be great to bring you into the conversation here. As I mentioned at the start, we're going to be exploring today some of the links between operational resilience and the T+1 transition. Do you want to start by just introducing how you see the links between the two and what role you think operational resilience is going to play in the transition.

Duncan: Thanks, Tessa. In terms of T+1, I find this personally very interesting because it's a good opportunity for me to talk about resilience in a new and evolving area as opposed to where it's been designed to work for financial services firms by its origination. I'll just reflect a little bit on why resilience has been elevated in its focus for some time, and that will hopefully lead very clearly into why T+1 has relevance for resilience and vice versa. Resilience was very much created as a concept to address some of the significant forces that have been operating over financial services markets for some time. A lot of those are around the increased use of complex technology and the delivery of financial services, reliance being placed on third parties and that becoming ever more present in financial services markets. The threat landscape becoming more severe and difficult to deal with but also increased expectations on financial services to operate cohesively, smoothly, accurately and quickly. Those forces have developed in retail markets over time. This is a good example of where wholesale markets are being forced to operate under perhaps more stress, more speed, and therefore, thinking about that from a resilience perspective, makes a lot of sense.

In addressing T+1, firms will be looking at what technology and third parties are we using? Does that need to change? And how those changes may impact our resilience. The go-live event creates, in some ways, a threat to the industry, to make sure it runs correctly because confidence is so important in financial services. If it doesn't work well, what does that say about the industry? And I think T+1 reflects a desire for financial services to run even more efficiently and smoothly. Expectations are increasing. In the way in retail markets, we moved away from cheques taking five days to come through into your personal account and this is just another reflection of speeding up services, making them operate that bit more quickly. In doing that, there's more stress placed on organisations to achieve it, and I think one of the statistics that certainly we've looked at in the past is around the services being delivered, is 83% more quickly in settlement cycles?

Menicos: Yes.

Duncan: Which is significant, right? There's work to be done here, and resilience can play a strong role in supporting that effort.

Tessa: Yes, really interesting and Menicos, I know you touched on earlier, the different impact and role for firms depending on what role they play in the market, and it'll be really interesting to get your thoughts in terms of, where do you see the biggest potential for disruption and where do those considerations and resilience particularly bite in the settlement cycle?

Menicos: It's a good question, Tessa. One of the points that we made last time when we talked about this, and we consistently make to clients, is this isn't an ops only change. You need to be thinking about this more broadly. It impacts clients, it impacts third parties and essentially the lens that firms need to think about it because to your point, different firms will play a different role in the execution to settlement chain is from a franchise perspective, what do I need to be thinking about to make sure that I can service my clients in all these products, in all these markets and how am I going to be confident that by the 11 October 2027, I'm in a position to provide them the same level or improved level of service because I am in a competitive landscape where others will be trying to do the same and so, you need to be thinking about this from a franchise lens. And when you do that, then to the point that Duncan was making, you then start to think about, 'Well, what role do I play in that execution to settlement cycle? Where are the sticking points? If I'm automating, what does that mean in terms of resilience for me where I'm using third parties? What are the hand-offs to me? What are my hand-offs downstream? And how am I going to get comfortable that downstream, that's all going to work?' And so, when we're talking to the buy-side, they're actively thinking about what this means from a liquidity and cash management perspective and how they also can be providing allocation and settlement instructions to the broker dealers faster to enable their broker dealer counterparts to process the orders more effectively, a great number of firms are on automated messaging systems but there is a very big volume of firms there that provide these details to their dealers via email and some via fax still. That's a sticking point and that's an element that the banks are reaching out to the clients to engage and start to talk about what the impacts are and how they make that part of the process work more smoothly. There are the hand-offs to agent banks, to brokers that you might use in particular markets to custodians, etc., what's really important in that impact assessment process is to look at the execution to settlement chain. What's upstream and downstream? And start to think about what's your strategy to engage with your partners to go on this journey over the next two years.

Tessa: As firms are working through and exploring some of those questions that Menicos has set out, what are some of the learning and techniques from firms approaches to operational resilience that they might be able to apply here?

Duncan: Thanks, Tessa. Well, just hearing Menicos's thoughts there, it gave me another point to think about, which is thinking about your purpose in the market is important here because there's a variety of purposes that firms will play, and Menicos has explained many of those. For resilience, where firms had to identify their most important business services, they had to think about, 'Why are we relevant in this market? What's our share? How many transactions do we process? And how does that work?' And firms will have identified settlement as being an important business service. On that basis, you've got a hook already to have a look at, 'Why did we deem this important? What role do we play in the market? And therefore, how do we look more holistically at what we need to do around this?' Many firms can be accused of looking very internally and particularly in this case, could be thinking, 'It is an ops thing. We're going to work our processes to get them more efficient,' without the regard for the outside role they play in the market. I would just advocate that taking that look at why you've defined something as being important from a resilience perspective probably gives you a little step up in terms of what Menicos was talking there about in terms of your individual role. But what I'll do, because that's added a little bit extra into what I was going to say, is talk a bit around some resilience approaches that can be helpful in this situation and how they might be used during the transition process, because I think that's really key here.

Firstly, one of the foundations of resilience is once a service has been identified as important, it needs to be mapped and understood. Clearly, when you're looking at the settlement cycle and T+1 and you're expecting everything to run that bit faster, I often think about it as you've got a train travelling from one station to the next station, and now we're asking it to get to that station a magnitude more quickly. When you're then looking at the rails, the people operating the train, the electronics system are making it work, you're now putting those under stress to do that much more quickly. I think we could probably all associate with if you expected your train to get somewhere more quickly, there's risk involved. The mapping which allows you to understand what you're relying on to get that train from start to finish or get through the settlement cycle is important. Digging that out, probably making your operational resilience colleagues your best friends as part of that can be helpful. What I would reflect on is that mapping has been something the industry really has struggled with. Often, it's not granular enough or it's too granular. It's not held somewhere consistent and updated regularly. There are struggles with mapping but in organisations where they've been able to get to a good position on that, it's an accelerator into this process and it's a good source of information to look at the settlement cycle.

The second point I would mention is around testing. This was probably one of the great innovations of operational resilience was to go into scenario testing. Within T+1, tests may have already been performed over settlement cycles as part of operational resilience. I'd be surprised if they hadn't and I would encourage firms to do them if they haven't. Using the insights from that, it would be good to already understand where vulnerabilities exist in that process, where risks might arise and where disruption could occur. Also, we're finding that there's more of a link between operational risk and resilience and so using RCSA techniques from operational risks can be insightful on where does risk arise in this process? Running tests or looking at previous tests are helpful in understanding where you are right now and what can already be addressed. I was going to say it's almost criminal. If you've got this information already, you have to use it, it's there for you.

Menicos: And look, I think this is very much the genesis for this particular podcast because we were going out and speaking to clients and understanding what they were doing in terms of their governance mobilisation, impact assessments and saying, 'What about operational risk? Are they at the table?' How can you leverage what you've done in terms of your broader operational risk and resiliency preparations that Duncan's mentioned to help accelerate the work that you need to do for T+1? Because those things can and should come together and it makes sense that firms leverage those. So, thank you Duncan for reiterating that but yes, essentially, it was to try and bring this message that we're giving to clients through all our bilateral conversations to a much broader base.

Duncan: Well, it's what gets me energised about resilience because you can take wider benefit from it. This is a change to a market structure here rather than firms looking at, 'We're going through a transformation around our technology, or we're adjusting the way we're delivering by using a third party.' All of that, very inwardly focused. This is a bigger shift in a market and that gets a bit more exciting and elevates the importance of resilience in the market. It certainly plays to my personal agenda. I had a couple of other thoughts on resilience points. One is around impact tolerances. I just wanted to call that out because it is a point that comes up regularly. I haven't quite landed on exactly what it means. So, I can't give full clarity on this, but in terms of impact tolerances, it's possible that given that settlement cycles will be changing, there are always going to be the similar number of transactions going through the markets with expectations every day for settlement to occur. That's why it's not particularly whether they change necessarily, but what I do think is it's worth monitoring that over time because with T+1 coming in, other elements of banks processes will become more tightly coupled. I know around finance, treasury, some of these other areas Menicos mentioned that says, 'This is not just an ops point.' As they become more tightly coupled, disruption is probably going to impact firms more quickly when it occurs because settlement cycles are going that bit faster. It's one that I'm certainly going to keep under review in terms of what it means for impact tolerances.

Menicos: And Duncan, before you go onto your next point, maybe for the non-operational risk aficionados in the audience, just give a bit of context and colour, what is an impact tolerance and why is it important?

Duncan: Yes, of course. It's a key point in resilience around setting a threshold for when intolerable harm will be realised if there's a disruption. If right now there was a disruption, how long before the impact on customers and markets would become intolerable? And through doing scenario testing and through mitigating actions, you try and recover before that point will occur. It's the key threshold for resilience efforts and so, therefore, when you're asking processes and services within settlement to deliver that bit quicker, can that intolerable harm manifest more quickly? That's the point that's being talked about there, but it's one that me and some of my more technical colleagues are still working through, but in reality, firms need to be operating to the T+1 cycle. Whether the tolerances change probably doesn't really matter for right now, it's more about getting the processes working to achieve T+1.

The last point I'd just make on it is how can you deploy some of these things in transition, which I think is the most practical way of looking at it. I've already said, if you can get hold of that mapping, you've got the insight already. If you can get hold of previous test information, again, that's another step up. Use those things. What I would say is, why not start testing now? Get closer alignment between the operational resilience efforts and the T+1 programme so that as things change or as technology shifts, increased automation is being put in place, you're able to understand, 'Well, how resilient is that technology we're putting in place? What stresses or capacity constraints exist around that?' So that if we have disruptions, we're able to catch up quickly. If a backlog comes up, we're able to catch up quickly. Testing as you go is a really good way of thinking about this given it's such a significant shift. You wouldn't want to be getting to the go live date and only in the month beforehand going, 'Right, let's see how this all comes together and are we going to make it?' There's plenty of time, but time goes oh so quickly, so complacency is the real thing to be careful of here.

Tessa: Absolutely, thank you. Lots of practical and invaluable takeaways there, which I'm sure our listeners will find valuable. One thing we haven't talked about yet is regulatory expectations. Duncan, I think you mentioned that there's a few areas there on operational resilience where firms are experiencing challenges. Are there any insights you can share in terms of the regulator’s expectations?

Duncan: Yes. I think over time, more questions will be asked by regulators on this subject. It's a quite neat way of bringing something that doesn't look initially like an operational resilience focused effort in alignment with it. Regulators tend to like asking questions about resilience in non-resilience context. I would expect senior management to be asked around how they're thinking about resilience in the context of T+1, that's tried and tested by the regulators and certainly, I'd be doing that if I was them. One thing I've picked up more recently from conversations with the regulators and I was out with them yesterday was that they like the concept of being threat led. Rather than constructing resilience tests and the like based on what internally within a firm we want to test, thinking about what threats exist in the market that if they occur to the firm could be harmful. This is a huge opportunity for the market to operate in a slick and fast way and with increased automation but as I said, there's a threat there in terms of if it goes well, if it goes badly. I'd be looking at T+1 as being something that firms should look at and consider. As I said, all that testing activity to de-risk the threat that that could pose to make sure that they're in a good position. I think as we move closer to the transition, the actual date in 2027, we'd expect questions to be ramping up and more interest but for now, it might just be, 'Are you thinking about this from a resilience perspective too?'

Tessa: And Menicos, anything else you would add to that in terms of what we're hearing and seeing from the regulators on T+1?

Menicos: Yes. the FCA has been very clear that this is on the regulatory agenda and that through their supervisory conversations with firms, they will be asking what firms are doing with T+1 and they expect to hear right now that firms are doing impact assessments, planning, and getting the resources in place to start change and transformation work from the beginning of next year. The other thing that I'd mention is that in some of the client conversations, people have asked, 'Will we get a stay of execution on the timelines here?' And the rebuttal for that is firm and continues to be firm, which is, 'No, this is going to happen’. It's not going to shift. I think that's very important to underscore. And yes, to the point that Duncan made, you can understand why management will get a question around how they practically apply operational resilience to something like this topic. I think that goes back to when you're thinking about what you're doing and by extension then, the articulation to regulators of what you are doing, you need to be thinking about this more holistically in terms of how you're approaching at a firm across all dimensions, including operational resilience.

Duncan: I think that's absolutely right. I would also add that the PRA have shared some general feedback to firms that while firms have been good at understanding client harm in terms of resilience and disruption, there is more maturity to be found around looking at market integrity and the functioning of markets when there's disruption and given this is a market-wide shift or across a large part of the market, I think that will draw some of their attention as well. They are likely to be more focused on how firms are thinking about their broader impact on the ecosystem and that is where the market is developing its thought process and so, this is a great case in point to be thinking about that. From my perspective, it's probably the first one of these. So, hence my general excitement of the subject, but it's going to be great to see how that all pans out.

Tessa: Brilliant, thank you both. Well, that's been a fascinating discussion, and we've covered a lot of ground, and one of the points that stand out is 2027 might feel far away but absolutely firms need to be very much progressing their work now. As we look ahead towards the remainder of 2025 and looking into next year, can I ask you both to leave our listeners with a takeaway message in terms of, what's the one thing that you'd really call out? Something that should be front of mind for firms as we look into the coming months.

Menicos: It's a franchise issue, not just an ops change and if you haven’t started, you need to get cracking right away.

Tessa: And Duncan.

Duncan: Make good friends with the operational resilience colleagues, in a way that it's great to spend time with Menicos on this issue. We don't always get the chance to work together. It's an opportunity within firms to create better links around that. I would encourage firms, first port of call, have that conversation, but clearly to Menicos's point, it is not just about resilience and about ops, but this one lens can be very much helped by having good relationships with resilience colleagues.

Tessa: Brilliant. Thank you both very much, and thank you to our listeners, as ever, for joining us. If you've enjoyed this conversation, please do subscribe to this series and you can automatically receive our future episodes and please do rate and review this series as it helps other listeners to find us. And if you'd like to hear more from us on risk and regulation, do look out for our regular publications on our website, which you can find a link to in the show notes, and I look forward to speaking to you again next month.